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Regulatory Sanctions

B/D Failed to Use Escrow Account in Contingent Private Placement

October 18, 2017

by Howard Haykin


Financial West Investment Group agreed to a $20K fine to settle FINRA charges that it acted as a placement agent for a contingent private offering of securities without using an escrow account for investor funds as required by Rule 15c2-4 of the Securities Exchange Act of 1934 and the firm’s WSPs.


BACKGROUND.    Westlake Village, CA-based Financial West has been a FINRA member since 1986. The firm has 103 registered branch offices and 233 registered reps. The firm conducts a general securities business. Relevant prior disciplinary action: in 2016, the firm agreed to pay $40K to settle FINRA charges that it failed to implement adequate WSP’s related to its due diligence of private placements.


FINRA FINDINGS.    In December 2014 and January 2015, Financial West acted as a placement agent for a contingent private offering of securities. The terms of the offering were set forth in a private placement memorandum, which provided that if a minimum of $I million was not raised by the closing date, the funds would be returned to the investors.


While the firm’s WSP’s acknowledged that, with respect to contingent private placement offerings, the firm is required to comply with the escrow requirements of Exchange Act Rule 15c2-4, the firm nonetheless failed to do so for the contingent private offering in question.


Exchange Act Rule 15c2-4 requires firms participating in a contingent offering of securities to promptly segregate investor funds either in a separate bank account as agent or trustee for the investors or in a bank escrow account. The Rule protects issuers and investors by ensuring that the issuer will receive the full proceeds promptly if the contingency occurs or that investors will receive a prompt refund if the contingency does not occur.


The firm raised funds from investors during this contingent private offering of securities and did not deposit those funds into an escrow account that had been established for the offering. Instead, Financial West either: (i) forwarded the investor checks to the issuer for deposit into the issuer's bank account; or, (ii) caused investor funds to be held in accounts at its clearing firm to be transferred to the issuer's bank account.


FINANCIALISH TAKE AWAYS.    FINRA Regulatory Notice 16-08, Contingency Offerings, addresses the problem laid out in this case - where broker-dealers have not complied with the contingency offering requirements of Rules 10b-9 and 15c2-4. B/D's that participate in best efforts public and private securities offerings that have a contingency must safeguard investors’ funds they receive until the contingency is satisfied. 


For example, upon receiving money or other consideration from an investor in a contingency offering, a broker-dealer must promptly:

  • deposit those funds into “a separate bank account” for which the broker-dealer is the account holder and is designated as agent or trustee “for the persons who have the beneficial interests therein”; or,
  • transmit those funds to a bank that has agreed in writing to act as the escrow agent for the offering.


This case was reported in FINRA Disciplinary Actions for August 2017.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2016049051501.